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FRANCHISEE PROFITABILITY EXPECTED TO GROW - SURVEY

by Simon Lord,
last updated 25/07/2017

1 August 2016 – Franchising Confidence Index survey reveals better results for franchisees and good prospects in the regions, although housing issues are a worry in Auckland.

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Profitability levels are trending upwards

Profitability levels are trending upwards

The overall picture

The overall picture

Franchize Consultants’ July 2016 Franchising Confidence Index demonstrates a strong increase in confidence levels for many areas, including franchisor growth prospects, franchisee sales levels and, particularly, franchisee profitability. This last is a key measure and results from a combination of higher expected franchisee sales levels with a smaller change in operating costs

Both Franchisor and Service Provider sentiments of franchisee sales levels showed a positive increase, with franchisors increasing from a net 39% to 51%. Meanwhile, Service Providers featured a very confident increase from a net negative 21% to a positive 30%.

After seeing a positive outlook for operating costs in April, Franchisor and Service Provider groups’ outlook for franchisee operating costs has dipped slightly.  Franchisor sentiment decreased from net 3% to a negative net 6%, whilst Service Providers decreased from net 26% to a net 5%. 

The outlook for franchisee profitability levels has bounced back to levels similar to January. Franchisor sentiment recovered  from a net  21% to a net 40% (net 44% January) while Service Providers remained  optimistic, with a net 40% in July, only slightly below the net 47% in April.

Franchisor sentiment for franchisor growth prospects remained stable at net 46% compared with a net 45% in April.  Service Providers perceptions showed a slight increase at a net 50%.

Opinions differed over the outlook for general business conditions, with Franchisors slightly more sombre in their expectations (net 26%, down from net 33% the previous quarter) while Service Providers increased from a net 37% in April to 50%. 

What’s happening?

The continuing discussion of the Auckland housing market is at the forefront of many people’s minds, with Franchisors’ comments including:

  • Auckland housing market and now changes in the LVR will have an impact on finding and franchisees being able to fund into businesses.  Same factors are/will also influence spending patterns, particularly in Auckland.
  • Changes could come if the housing falls and people have overextended and lose equity in their homes.  The size of peoples mortgages have increased which gives challenges for both borrowing money and servicing huge debt.

However, as one Service Provider commented, this has a positive effect on prospects in the rest of the country [see cover story in our latest magazine]:

  • Notable increase in enquires to purchase franchises in markets outside of Auckland, particularly in Christchurch.

Service Providers (bankers, accountants, lawyers, etc) always offer an interesting perspective on the issues facing franchisors and franchisees, because they see a broader picture across many different franchises and industry sectors.  The survey asked how they thought things were looking for franchisors and franchisees, and their responses were generally positive. Key examples include:

  • Generally, conditions are positive for franchisors and franchisees.
  • Positive.
  • Marginal improvement overall, but still tough for non-food retail.
  • Positive in general. Stable economy, strong migration etc spell for a strong domestic demand outlook. Retail and services franchise businesses should experience period of growth.
  • Notable increase in enquiries to purchase franchises in markets outside of Auckland, particularly in Christchurch.
  • Some concerns around hospitality with a number of sites experiencing difficulties or diminishing profits and constant increasing competition.
  • Restrictions on property leverage may remove some available equity from the market and slow system growth.
  • Very solid and a great business client at present.
  • One would assume that overseas events may lead to immigration and attract more franchisees and staff and a bigger local market.
  • Growth in economy will help main centres. Maybe 2 paced with regions affected by Dairy sector. RB restrictions may impact franchisees access to capital.
  • Obviously the hard push against increasing property prices may have a dampener on future prospects.

Comments

Dr Callum Floyd, managing director of Franchize Consultants, says the latest Franchising Confidence Index continues to demonstrate a generally positive outlook overall. 

‘Many of the measures which softened last quarter have seen some confidence regained, specifically: franchisors outlook for franchisee sales levels, franchisee profitability, and to a lesser degree franchisor growth suitability. 

‘Franchisor and Service Provider comments confirm, overall, the level of sentiment recorded. Key challenges for 2016, identified in January, clearly remain – including finding franchisees, increasing investment or operating costs and access to finance. 

‘This survey is notable for the comments relating to property values and/or new lending rules, and the various impact either or both may have upon prospective franchisee sentiment and ability to raise capital. Combined with an environment where competitive intensity is high, margins are not expanding and good staff are hard to come by, there is clearly a need for franchising companies (including franchisors and franchisees alike) to be structured and executing their business models to the highest possible standard.’

The data and analysis presented represents the views of 35 Franchisors and 20 Service Providers collected between Friday 22 July and Friday 29 July 2016. Findings from both groups are reported separately. Read the full report here.

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